Business managers analyze variable and fixed expenses to know costs of business operations and expand on methods of increasing profits. Knowing both variable and fixed expenses helps management to price products and develop sales goals. However, to analyze expenses fully, management needs to have access to comprehensive data and itemized costs. In financial analyses of external companies, the limited data holds little value.

Variable Costs

A variable expense can change from month to month or week to week. For example, raw materials a manufacturing company uses to produce a final product would be considered a variable expense. Because production levels will cause the amount of materials needed to vary, this is considered a variable expense. Other examples of variable expenses include packaging, advertising and sales commission. Direct labor is also considered a variable expense, as the costs vary with production levels and output.

Fixed Costs

Fixed costs, or overhead, are expenses a business pays regularly that are not directly related to output. Certain fixed expenses will not fluctuate with production levels. For example, if a business rents or leases facilities, these costs are regular and level, regardless of production output. Property taxes, utilities, insurance premiums and management salaries are also examples of fixed costs, expenses that remain the same through varying levels of total sales.

Breakeven Calculation

In a breakeven analysis, total sales simply equal total variable expenses plus total fixed expenses. However, businesses generally have multiple variable costs and multiple fixed costs. In addition, sales revenues can vary based on cyclical factors and seasonal needs. Determining one variable expense when given only a fixed expense and total sales is not feasible. However, given the total of fixed expenses and total sales, simply subtract fixed expenses from sales to get variable expenses in a breakeven evaluation.

Consideration

In analyzing the financial data of a business, to determine a variable expense when given an amount for fixed expenses and total sales, you will need to know the markup, or how much the business adds to the manufacturing cost to reach the retail price. For example, suppose for the sake of simplicity, a business adds 10 percent to the manufacturing cost for profit. This figure needs to be injected into the equation to figure variable expenses. Otherwise, the calculations will result in a break-even figure, which amounts to sales equaling total variable costs plus total fixed costs. A business may use this calculation to figure product pricing and for internal management.

About the Author

Vicki A Benge began writing professionally in 1984 as a newspaper reporter. A small-business owner since 1999, Benge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals. Her business and finance articles can be found on the websites of "The Arizona Republic," "Houston Chronicle," The Motley Fool, "San Francisco Chronicle," and Zacks, among others.